Richard Hart - Chief Financial Officer Marcus Ryu - Chief Executive Officer.

Matt VanVliet - Stifel Nandan Amladi - Deutsche Bank Ken Wong - Citi Monika Garg - Pacific Crest Securities Jesse Hulsing - Goldman Sachs Rishi Jaluria - JMP Securities Ian Strgar - UBS Taylor Reiners - Piper Jaffray Vinay Mohan - William Blair Brad Sills - Bank of America/Merrill Lynch Sterling Auty - JPMorgan.

Good day and welcome to the Guidewire’s Third Quarter Fiscal 2017 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Richard Hart, Chief Financial Officer. Please go ahead..

Good afternoon, everyone and welcome to Guidewire Software’s earnings conference call for the third quarter of fiscal year 2017, which ended on April 30, 2017. My name is Richard Hart. I am the Chief Financial Officer of Guidewire. And with me on the call is Marcus Ryu, Guidewire’s Chief Executive Officer.

A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.guidewire.com.

As a reminder, today’s call is being recorded, and a replay will be available following the conclusion of the call.

During the call, we will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies and the anticipated performance of the business, including developments in connection with our recent acquisition activity.

These forward-looking statements are based on management’s current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially.

Please refer to the risk factors in our most recent Form 10-K and 10-Qs filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release.

Reconciliations and additional data are also posted in a supplement on our IR site. During the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details maybe one-time in nature and we may or may not provide updates in the future.

With that, let me turn the call over to Marcus for his prepared remarks and then I will provide details on our third quarter financial results and our outlook for the fourth quarter and the rest of the fiscal year..

Thanks, Richard. Revenue and profitability exceeded our guidance ranges in the third quarter, with license revenue of $59 million, total revenue of $123.4 million, and non-GAAP operating income of $17.1 million. Trailing 12 months recurring license and maintenance revenue totaled $304.9 million, an increase of 22% from a year ago.

A diverse mix of deals in the quarter drove our performance, including a large follow-on deal with a Tier 1 customer that closed earlier than expected, 4 new InsuranceSuite customers, several new digital and data licenses, and our first InsuranceNow customer since our acquisition and re-branding of ISCS.

In North America, Attune Insurance selected InsuranceSuite and data for lines of business serving the small and medium-sized commercial market. Electric Insurance, originally founded in 1966 to serve employees of General Electric, selected InsuranceSuite digital and data for their personal lines.

The Workers’ Compensation Board of Nova Scotia also selected InsuranceSuite digital and data. These transactions illustrate the high attach rates we continue to see in digital and data and continue to validate our investments in these new products.

In addition to these customer wins, BPCE Assurances, part of the second largest banking group in France, selected ClaimCenter. And Rockingham Group licensed InsuranceNow for its home, auto, farm, and small business lines, becoming the first new customer for this cloud-based core system offering since our acquisition of ISCS.

The cross-selling of our digital and data products into existing customers continued as a theme in the quarter. In addition to the new customers I just mentioned, Amica, Hartford Fire Insurance, Seibels Technology Solutions, and P&V Assurances in Belgium all licensed one or more of our digital products.

While a new customer we announced earlier in the year, Saga Services in the U.K., added on our digital products to their implementation of InsuranceSuite. We have begun adapting our digital and data products for cloud-based delivery to work equally well with either of our core system platforms, InsuranceSuite and InsuranceNow.

As the themes of digital customer engagement and sophisticated data analytics continue to grow in urgency, we believe that we have the opportunity to deepen and expand our products in these domains, and a tight integration with the core operating platform will continue to be a key source of differentiation.

Our largest deal in the quarter and indeed the year was with an existing Tier 1 customer who expanded their license of PolicyCenter beyond their current use for commercial lines to all of their personal lines as well as adding several digital products.

As we have discussed before, the timing and structure of large transactions can be challenging for us to predict precisely. This transaction is an example of that variability, having come in a quarter earlier than anticipated, thereby shifting some of the end-of-year seasonality to the third quarter.

While earning new and expanding existing customer relationship is important, it is equally vital that we follow through on our delivery commitments. Guidewire’s services team continues to distinguish itself by helping our many diverse customers achieve implementation success.

In this quarter, we celebrated multiple go-lives and upgrades of our core data and digital products, including at Alberta Motor Association, AXA Asia, Mountain West Farm Bureau, and Safety National.

We also had the initial go-live of PolicyCenter and BillingCenter at icare, one of the largest workers’ compensation programs in the world, insuring over 3.1 million workers in New South Wales, Australia. And Nationwide Insurance became our first Tier 1 consumer to go live with our digital products.

And especially noteworthy in the quarter was the initial go-live of a customer project we had described on previous calls as the digital greenfield initiative.

This cloud-based implementation of InsuranceSuite with MetLife was notable in several respects, namely for supporting a major insurer’s launch of a new, digital-only, go-to-market approach and for being the first time that Guidewire is taking full responsibility for ongoing delivery of our software post-production.

So this project and other internal efforts, we – through this project and other internal efforts, we are significantly increasing our competency to deliver and support large-scale transformation programs in the cloud.

We expect to leverage this capability in FY ‘18 as larger insurers begin to evaluate cloud-based implementations for their core-based business lines. In summary, our third quarter advanced our market adoption and capability and enhances our confidence in achieving our financial goal through the year.

This is a highly dynamic time for the enormous global industry we serve. We see insurers around the world grappling with new entrants and structural changes and end-market behavior, driving to leverage new technology for customer engagement and investing in new go-to-market and analytic approaches.

We believe excellence in industry-specific software development and delivery has never been as relevant or as well rewarded as it is today. And we are determined to continue to have leadership position as a trusted partner to the industry.

I’ll now turn the call over to Richard to review our third quarter results in more detail and to provide our financial outlook for the fourth quarter and the rest of the year as well as offering a preliminary high-level view to fiscal 2018..

We anticipate total revenue to be in the range of $499 million to $503 million, representing an increase of 18% to 19% over fiscal 2016. Within revenue, we anticipate that license revenue would be in the range of $258 million to $262 million, an increase of 17% to 19% from fiscal 2016.

We expect maintenance revenue to be in the range of $67.5 million to $68.5 million, representing an increase of 13% to 14%. And we expect services revenue to be in the range of $172 million to $174 million, an increase of 19% to 20% from fiscal 2016.

We expect non-GAAP operating income to be in the range of $86 million to $90 million, resulting in full year non-GAAP operating margin of approximately 17.6% at the midpoint. We anticipate that non-GAAP net income in the range of $61.4 million to $64.1 million or $0.82 to $0.86 per diluted share based on approximately 75 million diluted shares.

We anticipate a GAAP – a non-GAAP tax rate of approximately 32% and an effective GAAP tax rate of 49% for the full year. We now expect free cash flow of between $85 million to $95 million and operating cash flow of $92 million to $102 million, with anticipated capital expenditures of approximately $7 million.

Therefore, for the fourth quarter, we anticipate total revenue to be in the range of $165.8 million to $169.8 million, representing growth of 17% to 20%. Within revenue, we expect license revenue of $96.2 million to $100.2 million, maintenance revenue of $17.5 million to $18.5 million and services revenue of $50.6 million to $52.6 million.

For the fourth quarter, we anticipate a non-GAAP operating income of between $39.4 million and $43.4 million and non-GAAP net income of between $27.3 million and $30.1 million or $0.46 to – I am sorry, $0.36 to $0.40 per diluted share based on approximately 75.6 million diluted shares.

We anticipate a non-GAAP tax rate for the year of approximately 32% and an effective GAAP tax rate of 47% for the fourth quarter. Looking beyond fiscal 2017, we expect new products and delivery models to combine with ongoing demand for technology to produce continued revenue growth.

While our goal remains to grow recurring revenue by 20%, we also expect to increasingly deliver products with ratable licensing models complementing our traditional term licenses. The mix of term and ratable licensing models is difficult for us to predict.

The amount and timing of transactions that would be accounted for on a ratable basis each have an impact on the amount of the license revenue we can recognize in the fiscal year.

We will be working to assess that mix as we complete our budgeting work for fiscal year ‘18 and hope to be able to provide better direction in our fourth quarter earnings call, but it must be emphasized that these transitions reduce the visibility on how much new orders can be recognized as revenue within any given fiscal year.

With regard to services revenues, we anticipate a significant increase in fiscal year 2018. We are currently estimating that services revenue will grow by 30% to 35% next year.

Such increase is being driven by the recognition of deferred and services revenue from our MetLife project, services related to ISCS implementations and organic services growth.

While this will increase services as a percentage of revenue in fiscal year ‘18, we continue to focus on the implementation of programs designed to maintain a long-term model wherein services represent approximately 30% of total revenue. Our margins and profitability in fiscal ‘17 will be substantially ahead of our initial guidance.

This improvement can be attributed to several factors, including more modest dilution from our recent acquisitions, higher than anticipated services margins and more modest headcount increases.

We believe our operating margins in fiscal ‘18 will improve incrementally even as we anticipate a greater mix of lower margin services revenue and utilization rates, which will decline to more sustainable levels.

Furthermore, in addition to standard investments in R&D and sales, next year, we anticipate increased levels of G&A spend as we fund investments and information security requirements for future cloud deployments and implement new systems, including [indiscernible] revenue system.

In summary, our third quarter performance exceeded our expectation and reflects continued demand for transformational technology in the P&C insurance industry. We look forward to continued growth this year and beyond as we focus on providing advanced solutions and flexible delivery options to meet the evolving needs of the industry we serve.

Operator, you can now open the call for questions..

Thank you. [Operator Instructions] We will take our first question from Tom Roderick with Stifel. Please go ahead..

Yes. Hi. Thanks for taking my questions. It’s Matt VanVliet on for Tom this afternoon.

I guess I wanted to focus first on the large Tier 1 deal that you were able to pull forward, could you – can you give us a little bit more detail in terms of how that sales cycle sort of progressed, maybe a little bit more on the customer in terms of what they have been using and how successfully they are there on the go live or the middle of the implementation?.

Yes. So out of respect for the customer wishes, we are not discussing their names. They are a large U.S. Tier 1 insurer with whom we have started a relationship on their business line, the commercial lines of business and which is – which are significantly smaller than their personal lines of business.

It was always their intention, I believe to expand the relationship once we had demonstrated our capability of delivery. And it was on the strength of the success of the initial phases of the program that this customer developed the confidence to move forward with an expansion of the relationship.

This is pretty much how all of our Tier 1 relationships evolve over time, but they do it at different paces as we have discussed in the past. This was approximately on schedule. We are approximately on average for the next material expansion of the relationship. It just happened to be particularly large in size..

And then also on some of the sales activity around the InsuranceNow platform, can you talk about what the response has been from potential customers and maybe even existing customers that might have smaller either subsidiaries or other businesses that, that might be more appropriate for?.

Sure. I think overall, the acquisition has been very well received by our end customers. On the part of existing ISCS customers, I think they were comforted to know that we were very committed to the product line and continuing to invest in the health of that and the evolution of that product over time.

And in the case of Guidewire’s prior customers and prospective customers, I think having this additional option, which applies to quite a different segment than our traditional focus, was also well-received as an interesting strategic choice that they would be allowed to make now while continuing to work with Guidewire.

Naturally, since the acquisition closed, we have always been focused on integration and in bringing our – getting our go-to-market strategy together and communicating a clear product strategy to the market. And I think that has led to a development of the pipeline that we need to execute on for this coming year..

Alright, great. Thank you..

And we will take our next question from Nandan Amladi. Please go ahead..

Good afternoon. Thanks for taking my question. So Marcus, in your script, you’ve increasingly made mention of digital products becoming a bigger part of the new bookings.

Can you characterize that, perhaps quantify it, relative to the last couple of quarters versus maybe the same period a year ago or 2 years ago and what impact that’s had on your overall win rates?.

Yes. I don’t have a specific calculation though as we did last year, we will be forthcoming with a specific number in our Analyst Day or actually in our Q4 earnings call. I can tell you qualitatively that it has been roughly continuing constant from the last number of quarters.

I think in the past, we characterized new product sales as contributing about a quarter of our bookings and that would be my guess for approximately where we are today. They are very important to – they are the motivators for customers to move forward with major transformation programs.

The themes of digital engagements of data sophistication and predictive analytics, all of these are very, very topical themes.

And even if the early stages of the project are the same in that we are talking about replacing an existing legacy system and those steps are not that different today than they were 5, 10 years ago, the ultimate business objective is now, more often than not, framed in terms of changing the engagement model with the insurance and customer.

And so the theme of digital is very, very important and is a major part of the evaluation cycle..

Thank you. And a follow-up for Richard – as we look into next fiscal year, how much – how many moving parts I guess are still left in the deferred revenue, you made mention of this in your script a little while ago about an early view into next year.

First of all, might the deployment choices that you are giving customers now sort of, in a sense, reduce your visibility and then more near-term deferred revenue from MetLife and other projects that are imminently going live over the next quarter or two? So maybe could you characterize how you see this playing out over the next five quarters, say?.

So on the deferred revenue side and MetLife specifically, we have accrued approximately $20 million of deferred revenue over the life of the project and we will be taking that through the revenue line over the next eight quarters kind of in a linear fashion.

So you will see at least the effective MetLife will be to reduce our deferred revenue balance over the next little bit of time. There are moving pieces and we will talk more about the moving pieces on our fourth quarter call.

We still don’t have sufficient visibility to be very specific about where we think the mix of transactions will come in next year. And I think even at the beginning of the year, we’ll still have some uncertainty around that. So, this is kind of a new market for us.

But those projects should not necessarily significantly increase deferred revenue since we should start taking revenue on those projects as soon as the product is provisioned and therefore the deferred revenue balances should be muted.

The additional deferred revenue increase that you saw this year was really the artifact of a significant maintenance boost because of the size of the one large transaction in the maintenance line.

And for the license, we simply tend to have some variability on license deferred simply because of the timing of our billing and invoices of last collection from our customers..

Thank you..

And we will take our next question from Ken Wong with Citi..

Hey, guys. So this is a question for Richard first. You mentioned that profitability in ‘18 will be higher than what you guys had previously discussed. And if I recall from Analyst Day, you guys are thinking kind of 2 to 3 points above the 20% in ‘16.

I guess any rough sense for how much above it might be? And is that really just from the impact of the deferred revenue coming off a little quicker or is there some other elements there that’s driving that higher?.

No, I think there are lot of moving pieces that will affect margins next year. One of the things that I think is important to note is that we came into this year looking at significant dilution from three acquisitions and the accounting effects of the MetLife deferral. You are going to see those kind of come out of the P&L next year.

And we have already been able to reduce the dilutive effects of our acquisitions not insignificantly and expect to be able to do so by the end of the year. If you look at our new guidance, margin in the middle of our range is about 17.5%, which is significantly higher than the 15% that we started out the year at.

And so I think by the end of the year hopefully we can do that maybe even a little bit better. And then on top of that, you will see some incremental improvement in 2018. At least that’s what we can speak to right now..

Got it.

And then Marcus in terms of the – just kind of what you guys might do going forward with the cloud product, I guess, are you guys engaging with customers now? Any rough sense for kind of are those large customers, small, medium-sized customers? Just any color on what that pipeline might look like will be great?.

Sure and thanks for the question, Ken. To be clear, we have two offerings for a cloud-deployed solution, InsuranceNow, which is clearly sold and delivered only in that form and then InsuranceSuite, which is from its traditional on-premise mode and now going into the future, there is an option of it being cloud-deployed as well.

We would not have embarked on the project with MetLife as a one-off. Always the intention in undertaking that was to develop the competency that we believe would be increasingly relevant to the market and we are definitely seeing that today.

In general, it would be larger and more complex operations, business units or entire companies that would find the cloud-deployed InsuranceSuite model to be the most appropriate for them. We are guessing right now or estimating what portion of the future demand for InsuranceSuite will come in that form.

We think it’s increasing over time, but we are not in a position yet to guess exactly how much of it will come over time. We are going to – and we are going to put forward a view and that will be incorporated into our guidance that we will give after the next earnings call..

Got it.

I guess, maybe just a quick follow-up in terms of the InsuranceSuite cloud portion, I mean, have you already had some of your larger customers reach out to at least inquire about it or is that still a little early?.

No, we are engaged in multiple conversations with customers, in fact, not just in the U.S., but internationally as well.

I think the appeal is definitely there and there is – and the underlying drive to simplify IT environments and transfer more of the postproduction responsibility to us as the technology provider is I think a trend that we are going to continue to see.

Now we are not going to market universally in that form and we still think that the large majority of significant niche of Tier 1 and Tier 2 insurers are going to prefer the traditional mode of delivery.

But there is no question that there will be increasing demand for a cloud delivered form of InsuranceSuite over time and we are mobilizing accordingly..

Got it. Great. Thanks a lot guys..

And we will take our next question from Monika Garg with Pacific Crest Securities..

Hi. Thanks for taking my question.

First Richard, if I look at like 30% to 35% so – with revenue increase you guide for fiscal ‘18, it amounts to about $60 million higher service revenue, so maybe can you split the three buckets, it looks like it will be around $20 million-ish higher from insurance ISCS, InsuranceNow and then about $15 million-ish, I guess for this Greenfield project, MetLife project, is that the right way to think about it?.

I think there are three things that will drive services higher, right. One is MetLife will provide, I say approximately $10 million of additional revenue on top of an organic growth rate and services or anywhere between – let me not guess because I am not prepared to talk about that yet.

The other thing that will happen is that the ISCS services revenues, they only had a portion of this year will come in full next year and that will drive a significant amount of that growth as well.

And so it’s the operation of the organic growth in services, the InsuranceNow revenue stream that comes fully online in fiscal year ‘18 and the MetLife deferred revenue recognition that will drive that 30% to 35% growth..

And then how much is the organic you are expecting and what is the gross margins you were expecting for this one, for the services?.

So we will provide more definitive guidance in our Q4 call, Monika. We try to provide some sense on the Q3 call to make sure that people understand what the big moving pieces are in our model, but we will be much better prepared to give you that kind of detail in Q4..

Got it.

Then just moving to the MetLife project, maybe if you can provide more details, are you managing all the – now the data would – have been moved to the cloud and has MetLife moved everything on the cloud or just some part of the data or just some part of your solution?.

Right, to be clear, we have a two-fold relationship with MetLife. They have an existing book of business, several billion dollars in size in total premiums that is implementing InsuranceSuite in the conventional mode.

And then we will be into calling up to this point the digital Greenfield project as a separate effort with a different go-to-market approach, sort of digital only product, rebranded, remarketed, a distinct strategy and separate from that – their traditional book of business and that is what we have this cloud delivered form intrinsically operating in today.

In that latter category for that digital Greenfield project, we have full post-production responsibility for the delivery of the solution. And while it runs on AWS, it’s our responsibility to ensure service levels and customer experience and all the like..

Got it.

Marcus, could you share kind of the margins on this responsibility, what you have?.

It will be premature to do that, Monika. I think one of the topics that we want to be forthcoming about at the Analyst Day is to do a kind of side-by-side comparison of what the economics look like for our traditional model and projects of this type. In general, they represent a higher revenue level to Guidewire, a higher subscription fee.

That’s how we will be characterizing it, but of course, their heavier responsibility is on us well. And kind of cashing all that out and mapping it out clearly will be one of our tasks at Analyst Day..

Okay. Thank you so much..

And we will take our next question from Jesse Hulsing with Goldman Sachs. Please go ahead..

Yes. Thank you.

Marcus, can you give us an update on Europe and I think last quarter, you had started to talk about seeing a turn there and I am wondering if that started to follow through into bookings in the third quarter and what are your expectations for that geography as we go into the fiscal ‘18?.

Yes. Thanks Jesse. Europe is an extremely important geography to us. They are – by total premium volume, it’s larger than North America and any of the most significant enterprises that we want to sell to. The huge multinationals tend to be European. So it’s very, very important to us.

All the major continental countries in Europe are very under-penetrated for us to-date and we have significant long-term growth plans in all of them. This is – this has been a good year for us in Europe. I think we made a lot of progress and we still have more to achieve before the year is up.

In this quarter, I mentioned a couple of new transactions and expansions of relationships in the UK, a new customer in France, which is the first one for quite a while, an expansion of a key customer relationship in Belgium.

And we have had – we have seen a lot more activity in the dark region than we had in previous years and we are expecting to closing on some of that in the coming period..

Great.

And when you look at the Greenfield, I guess cloud based version of InsuranceSuite, what are the I guess deployment scenarios that you are looking at, I would assume that there is less of a core line type of deployment initially maybe going after more ancillary alliance or small alliance or new geographies or something like that, but I am curious in the conversations that you are having with potential new cloud customers, what do those look like as far as use cases and then I know it’s very early, but how do you think that translates into relative deal sizes versus what they might have been on-premise?.

That’s a very helpful question. We are seeing the demand come in all different flavors for that deployment choice. There are cases where it is entirely new business line, the Greenfield initiative, where there is a desire to very rapidly keep it distinct from the business as usual core book of business.

But we are also seeing situations where even for that core book of business, it might be an appealing choice.

And we don’t know yet the dynamics of that demand, whether we – it can be and will be motivated by just in a steady state situation or it will be a catalyst like an upgrade, kind of upgrade where that discussion will become more natural or it will always be accompanied with an expansion of business or not.

These are still questions that we will have to see as the demand evolves, but it’s definitely coming to us in diverse form. It’s not just in the U.S. It’s actually in all of our territories Europe, Asia Pacific, North America and across different sizes of insurers as well.

So I think over time, the customers that we support in that mode versus in the conventional mode of – that we deliver InsuranceSuite, they – those two except the customers, may look very similar over time..

Got it. Thank you..

And we will take our next question from Rishi Jaluria with JMP Securities..

Hi guys. Thank you for taking my questions.

With the ISCS acquisition closed, are there any additional steps that you need to take in terms of integration with some of the digital and data products or internationalizing it?.

Yes. There is definitely product work still to come, Rishi.

Our vision here is that we will have a choice of core, our traditional InsuranceSuite core, which is policy claims and billing as distinct applications that can be implemented and upgraded separately versus the InsuranceNow core, which is all-in-one and it runs on a single database, single application server, etcetera.

And they are both relevant to different segments of the market, in some cases both relevant to the same enterprise, but they are different cores. But we want to have all of our data and digital products and indeed any other ancillary products that we would build or acquire in the future to work equally well with both.

And there is work to be done to make that so. But as all of our products become more and more cloud based, we think that, that becomes easier to do and that’s – it’s all very much embedded in our product roadmap from here for all of our products..

Okay. And then how about on the side of – I guess ISCS was almost entirely U.S.

customers, are there any steps you have to make in terms of that to make it more applicable for the European market you thought – that you talked about earlier or any other international markets?.

Absolutely. Another key goal for InsuranceNow is that we internationalize it. There are – we have been through the international position journey before with InsuranceSuite and there is a lot of work to do. It’s not merely a matter of localizing the products so that it can support different currencies and languages.

But actually, the larger corpus of work is adapting it to the regulatory requirements, the reporting requirements in different geographies and kind of pre-building the integrations that are required.

We think we can do this significantly faster than we have – than we did with InsuranceSuite over the years because of that experience and the competencies we have now, but that work is ahead of us.

Over time, we really just expect to have these two core choices that should apply to the entirety of the global P&C market and then we want our data and digital products a single version of each to work equally well with both of those cores..

Got it.

And now going back to the MetLife project, Marcus, what – I guess what sort of milestones or benchmarks are you looking at with that project to gaze a level of success with it? And what needs to happen with that project until you are ready to take on other digital greenfield projects like that and you have the capacity and bandwidth to do so?.

Yes. I would say that we are ready right now and we are actively engaged in those discussions. And that was part of the goal of this program was it’s one thing to plan to be ready, it’s another thing to actually do it for a significant customer as you are scaling up that capability.

And they have – our relationship with MetLife has been invaluable in really capability testing, what we are doing with the team and our readiness to serve other customers as well. But it was always with a mind towards pursuing other relationships at the same time and we intend to go to market with that.

We are actually impacted in the market with that right now..

Okay, got it.

And then yes, just in terms of any specific milestones on that project with the MetLife project?.

Right. So, one difference with this project, in addition to the fact that we have post-production responsibility for delivering the software really as a service to that customer is that we are sharing in the risk of their business success, right. They are going to market with a new approach, essentially a new business unit.

And however, well, the software works – that business unit actually has to succeed in the market and we participate in that risk and in the upside as that business grows.

That’s different from most of our traditional relationships, because of course in a traditional situation where we are just replacing a legacy environment there generally aren’t really ambitious growth plans because they are starting from a large base.

In this case, they are starting from no premiums with the ambitions to grow them substantially from there and the relationship that we structured has us participating in that growth..

Okay, got it. Thank you. And one quick follow-up if I could squeeze it in for Richard. You mentioned in your prepared remarks that you are seeing an increasing amount of license being ratable versus term.

Can you give us a sense just directionally how that number has been trending and maybe what sort of portion of license revenue is ratable versus term?.

So we are at the very beginning stages of this very long, what I believe will be a very long and transformation of the P&L model. And right now, I think you should understand that ratable revenues are well below 10% still. When they go above 10% in the form of subscription revenues, I think you should expect us to actually break it out.

But when I talk about next year, what I want to make sure I emphasize is that there’s a certain amount of uncertainty with regard to how many transactions actually take the form of a ratable license and when they fall because those two things, the number, the amount and the timing of those transactions create a little bit of uncertainty obviously because our term license model allows us to recognize all of the license for any particular year upfront.

So what I was referring to is that now – I think now, we feel ready to disclose that we are in kind of an active phase of transitioning although we feel that, that transition will be very gradual and will last a long time..

Okay, got it. That’s very helpful. Thanks so much, Marcus and Richard..

Thank you..

We will take our next question from Ian Strgar with UBS. Please go ahead..

Good afternoon, guys. So you guys posted not quite $20 million of upside to total revenues in the third quarter.

And I understand that some of that was pulled out of the fourth quarter with a large Tier 1 expansion, but can you guys just comment on how – since this was only one Tier 1 expansion that led to significant upside in the third quarter, can you guys just comment on what the Tier 1 pipeline for the fourth quarter looks like and whether there is any room for upside surprises there?.

So if I may that it’s very difficult for us and we definitely don’t want to be put in a position where we are talking about our pipeline on a tiered basis.

We have conversations with Tier 1 customers all the time not only for initial sales but for follow-on sales and they can fall in any – with some variability or even with a certain kind of a lack of certainty. In this particular case, we were able to pull it upfront.

But I think it would be a mistake to consider that this transaction was unforeseen upside, right. We have started getting a very good idea of what this transaction would look like very early in the year, and the uncertainty was whether or not we would be able to close it before the end of the quarter.

That does not mean that we have in our back pocket $20 million of additional bookings. That’s the figure you mentioned in the fourth quarter, and we would urge people not to think that those kinds – these kinds of transactions happen on a daily basis for us..

Yes. I would – I stand behind everything Richard just said, of course. And it’s worth pointing out that this transaction this particular customer is somewhat anomalous. But of course, we have active conversations going with insurers of all sizes and a lot of emphasis with the very biggest insurers as well.

And there are some – a number of those relationships that we hope to bring to contract over the next few periods. We have always emphasized the fact that it’s not merely a matter of winning a mandate, but with how that mandate is structured with the customer.

And sometimes, we have a very promising relationship that starts out quite small and then there are cases where they start out much larger than that and that variability is also a point of negotiation and therefore of uncertainty. So we have the kind of probability weight, all of that, in giving guidance, and that’s what you see reflected.

The fact that this one transaction closed earlier is very helpful in terms of de-risking our outlook with respect to what we have guided to in the past, but of course, we are actively at work in multiple other discussions that we hope to bring to closure, too..

Okay, understood.

Can you guys update us on the Accenture partnership in Continental Europe and how that’s helping you in that geography?.

Yes. I think that’s – it’s an active partnership. We have examples of projects underway as well as some that have achieved meaningful go-live milestones.

I would say we are partnering as effectively with them as we have with all our partners over the years with notable caveat that our relationship with Accenture is really confined to relationships outside of the U.S. – with the customer relationship outside the U.S., which we’ve been able to make work just fine.

While they are an extremely capable firm and we are glad to have them allies with us, they have limited power to really change the timetable of big decisions, but they are – it’s very helpful to have their presence in country with automated language speakers and people who know the local industry in terms of comforting a customer that we can see their project all the way through their success.

That’s very helpful and we expect to rely on them more heavily over time..

Thanks, guys..

Thank you..

And we will take our next question from Alex Zukin with Piper Jaffray. Please go ahead..

Hi, guys. This is Taylor Reiners on for Alex. I just wanted to dig in a little bit more on InsuranceNow.

How are you segmenting opportunities? Well, both InsuranceNow and InsuranceSuite might be appropriate like in Tier 3 and Tier 4 customers and how did the ASPs between the two differ?.

Right. So as I think it’s embedded in your question, you appreciate that in most cases, it’s very clear, very large complex insurer that can only implement one domain at a time will clearly be for – only for InsuranceSuite. And of course, that’s any insurer today. It’s outside the U.S.

We would only have InsuranceSuite to offer whereas a smaller line of business, a smaller insurer that is prepared or is requiring us to implement all three domains policy claims and billing at the same time and wants it in the cloud is very well suited for InsuranceNow. And in between, there are some gray area and judgment.

I think the biggest considerations are, do they want it deployed in the cloud as that kind of service or do they have an IT organization capability, comfort that they wanted in their traditional data center? And companies are generally pretty clear about their preference from that score.

And then how prepared are they to conform to a somewhat narrower path with InsuranceNow in terms of degree of the freedom on their implementation? InsuranceSuite, by its design, is an extremely flexible and general product. That’s how we have been able to support customers of all sizes in 30 different countries all over the world.

And InsuranceNow is a bit more narrowly targeted. And that has, in some cases, a great advantage because it’s a closer strength to the finish line for them to this – of a project. But sometimes, it also constrains what a customer may want.

And in that gray area, we have to make a judgment call once we understand the customer’s requirement about which solution they need that. I think the vast majority of the time when you apply this criteria it will be straightforward which one applies and then our sales team is perfectly capable of now positioning either..

Got it. That makes sense.

Then just a quick follow-up, when we are looking at – how should we think about how increased execution in – for InsuranceNow could affect margins next year, potentially boost free cash flow? And what – I am just wondering how you are thinking about that?.

I think it’s just a little bit early to tell. I think that question falls into the buckets that we mentioned before about trying to understand how the configuration of transactions is likely to develop next year, and we are still working on developing our judgment around that, and we will be ready to talk about that on our Q4 call..

Got it. Thanks, guys..

And we will take our next question from Justin Furby with William Blair. Please go ahead..

This is actually Vinay on for Justin. I had 2 quick questions. One, just following up on the large Tier 1 deal that came in earlier, did all of that come in this quarter or was there some contribution that’s left for the next quarter? And then I had a follow-up..

Yes. Not to be specific about quarter to quarter, I can tell you that there’s a great deal more in this relationship that we hope to continue to evolve. This isn’t – it’s far from the entirety of our offering.

It is a very material and substantial commitment that they have made to the next phase of their relationship with us, and we have to execute on that and make further progress before, I think, a comparably sized expansion would be on the horizon.

But if you compare the distance from the first to the second stage of that – of our relationship with this customer, it’s tracking pretty well now to our track record when we deliver on our promises in the first chapter..

And to be specific, we don’t anticipate recognizing any license amounts from this transaction until next year at around this time.

And what you may see is there’s a small incremental increase in annual license payments for this particular customer, what we call ramp structure, although the ramp structure here is – features a much more modest incline than we might have for some of our other transactions.

And obviously, the maintenance portion of this transaction will be recognized ratably throughout the next four quarters..

Got it. Makes sense. Marcus, I just wanted to kind of follow-up on Eagle Eye and just analytics in general. If you could provide some color on kind of what kind of insurers are buying it. How does it overlap with what Verisk is doing? And then if you could maybe add some color on the opportunity on the data side longer term? That will be helpful..

Yes, it’s quite a complex topic with many dimensions to it. Specifically, with respect to Eagle Eye, I think we have been learning not so much – how much –how the product works but how to represent it in a way that’s most digestible and valuable to customers.

And one of the conclusions we have come to is that what insurers would really want to see is predictive analytics applied in a very actionable sense to a set of decisions that they know that they can move the needle on and that would have economic value when they do move that needle.

And so – and there’s a preference for seeing that kind of tangible application as opposed to seeing a very general analytics platform however sophisticated.

So what we are doing with Eagle Eye, which we now call Guidewire Predictive Analytics, is really applying it decision by decision to key points in the process that are supported by InsuranceSuite across both claims and policy and bringing it right to the knowledge worker that happen to make that decision that they have – they can have a more informed choice, in some cases, score and some kind of a set of criteria that are put in front of them; in some cases, an automated decision, and then – and really activating the predictive analytics that way.

We are pretty early with this process, and I think it’s been very well received, but the proof will be when we can – we have multiple customers applying it this way and kind of moving from decision to decision as they are – and applying this kind of approach. Now the other part of your question was generally about data.

Historically, we are not a data provider, right. Our systems manage enormous volumes of data for our customers, and now predictive analytics analyzes that data and mines it for predictive insight but we ourselves don’t broker data. We don’t have our own large repository of data that we sell back to customers and so forth.

We see – our role so far has been mostly a software company providing the tools to create, structure, visualize and manage that data.

That could change over time, but that has not been our core business so far and it’s not something that – it requires a certain scale, as you know, to be meaningful there because there are so many different varieties of data that are relevant here. And just having one or two is kind of a dubious value.

We don’t see ourselves as competitive with Verisk. They are a very important partner to us. We have conformed policy center in the U.S. to work very much to their industry standard and that’s been helpful and appreciated by customers. So – and we see ourselves as very complementary to them.

And certainly, with respect to selling data as such, we don’t – we have not done that to date..

Got it. And then just one last follow-up for Richard, if I can.

Richard, do you think the normalized bookings growth rate going forward may be a bit faster than 20% given that ISCS kind of opens up more opportunity down market?.

It’s very hard for me to say exactly how much ISCS is going to promote bookings next year versus InsuranceSuite or any of the other kind of products. Obviously, we look at this as a portfolio approach, and we look at having all of the tools in our bag as necessary for – to continue to grow with the pace that we have been growing..

Kind of makes sense. Thanks a lot guys..

Thank you..

And we will take our next question from Brad Sills with Bank of America/Merrill Lynch. Please go ahead..

Hi, guys. Thanks for taking my question. Just one on digital and data, please. It seems like you are getting your stride there with that business. Is there something about the starting motion where you feel like you have kind of got execution down here in that business where you kind of hit the sweet spot of positioning that sort of offering to account.

A little bit of color please on that would be helpful. Thank you very much..

Yes. Thanks Brad. A number of things, I think have come together very well here. Obviously, there is end-market demand, right. The world is changing and end markets – our customers, end customers are behaving in what they prefer to see that is catalyzing a sense of urgency on the part of our customers for data and digital solutions.

So that’s obviously very helpful. I think we have executed well on the product side in being able to recognize those requirements, turn them around into compelling products and then also really connect those products to the data and the process that’s substantiated in the core in InsuranceSuite.

And I think we were a bit earlier than certainly many of our competitors and others in recognizing how important this would be and then actually building products that work and then making really customers successful. So I feel pretty proud of the early approach that we took there, and I have seen that work.

And then the third thing, I think, working quite well is the sales and go-to-market model, where we now have effectively an overlay team for these newer products that keeps an ongoing relationship with existing customers, some of the moving customers for us – with us for a very long time and have been able to deepen the relationship and motivate the case for implementing a data or digital product from us.

And that’s encouraging not only in its own right because of these products but because it represents another important growth factor for us as a business or maybe the most important growth factor for us longer term, which is that we can bring new solutions to market and be in a very advantaged and trusted position with our customers because they are using our core application to run their business..

Great. Thanks, Marcus..

And we will take our last question from Sterling Auty with JPMorgan. Please go ahead..

Great. Thanks, guys. I apologize if these were answered, but I got cut off for a little bit. I think you mentioned for MetLife that the greenfield was in a new business area.

I am just – I just want to clarify, what lines of insurance are being covered by the greenfield opportunity? What lines of insurance are being covered in the old model?.

Right. So, the greenfield opportunity – their newer lines of business are still personal lines focused, but they are different versions, different – digital-only or digital-first kinds of products that have been kind of reconceived, repackaged, repriced, redesigned in terms of their coverages and limits and so forth for the digital consumer.

And their start will be – the R1 of the project was on the homeowners line but it’s soon to be followed by a personal auto and by umbrella and by other lines of business as well. And in the insurance world, not all products that cover the same kinds of risks are the same.

So you can talk about personal auto insurance can look very different, it’s very different products that cover that same underlying risk depending on how it’s priced, structured, defined, segmented and sold.

And what MetLife has done is now approaching the market in a – I think, a different, quite innovative way to – with a very specific market focus and a different kind of distribution and service model..

And what is the technical architecture for this? I think you mentioned that – I think it’s being delivered through AWS.

So as you talk about other possible customer wins, is this single tenant just by its nature or is this something that eventually could become multi-tenant?.

It is single tenant by its nature and that’s a very strong preference not only of this customer, but we think of all customers because we are dealing with mission-critical data. They have their own kind of proprietary configuration of the system.

And in many cases, they have adapted it considerably to instantiate what they think of as their competitive advantage.

In the case of MetLife, I think they have done a number of very innovative things arm and arm with us on the digital front, but what they have – the underlying product there is InsuranceSuite, the same product that we have implemented now for hundreds of other customers.

It’s now deployed on AWS and managed and delivered by us, but the underlying software and what will be on the same upgrade path as all of our other customers, is the InsuranceSuite code base. And that’s our intention with any other customer that may follow in the same thing..

That makes sense.

Richard, on the ratable comments, are we talking about ratable being more because you are expecting more of these greenfield type of opportunities and more InsuranceNow in terms of the mix? Are you saying that you are starting to see a bigger preference or maybe you are motivating the move towards traditional InsuranceSuite purchases being in a ratable fashion?.

So it’s a little bit hard to read the signals from the market with any kind of fidelity at this point in time, but what I will say is that the number of people that are interested in chatting with us about kind of a cloud delivered format for InsuranceSuite gives rise to the question of how many of those customers will want to have the solution delivered to them that way next year or the year after.

And those solutions will be recognized ratably. In addition, InsuranceNow, Underwriting Management, Predictive Analytics, all of these solutions are recognized ratably as opposed to our more traditional core system sales.

And that mix is a little bit hard to prejudge at this moment in time, but I believe – and it’s only a belief, is that the dial will only turn one way. That is towards an increasing amount of our new license sales being recognized ratably.

And the speed of that transition – and I believe it will be slow and incremental, but the speed of that transition may affect, to some degree, how much of revenue we can recognize within a particular period..

That’s fair. And last question – yes, that makes sense.

Last question is given the early close in the Tier 1 deal, can you just comment then to your visibility in the guidance that you have given for the fourth quarter? Because that’s closer, that could be a more visibility, less or the same?.

Given the substantial more visibility, as you would guess, Sterling and there is still business that we have to get closed. And like any other period, there are opportunities and upside that we are pursuing as well.

But when you look a transaction of this size, having it fully executed a quarter early is a great help in being confident in the outlook for the entire year..

We have taken a big chunk that we had the probability weight in some way and taken it out of the equation. And so now that Q4 has a much more normal kind of mix of transactions and we are only a quarter out. Those two things help with visibility in and of themselves..

Great. Thank you..

Thank you..

And that does conclude our question-and-answer session for today. I would like to turn the conference back over to Marcus Ryu for any additional or closing remarks..

No other commentary. Thank you everyone for participating in our call today. Goodbye..

And that concludes today’s presentation. We thank you all for your participation and you may now disconnect..